~ Investment Strategy

Macro Stream

The news of the day is the release of China’s GDP figures for Q2. The headline number was 7.5% YOY, a.e., compared to 7.7% in Q1. Calculations of quarterly growth from the published figures give 7% QOQ annualised for Q2, 6.6% for Q1 and 7.8% for Q4. Add to that the fact that the latest release was only in line with expectations because the consensus had recently dropped from 7.8%, and the picture is of a rather weak picture for China compared to the assessments made earlier this year. In consequence, analysts are reducing their expectations for full-year growth.

There is some chatter about whether Messrs. Xi and Li are prepared to tolerate this lower path of growth. According to the FT, they have dropped the “protect eight” mantra of their predecessors. But that is a small data point compared to the actual GDP out-turn. This political assessment, it seems likely to me, is being driven by the published growth figures, and is effectively the same data point.

One thing that stood out in the recent Chinese data was the continued strength of the housing market. The volume of home transactions was up 24% MOM in June. This is a reminder that China is not a “command” economy, if there is ever really such a thing. Administrative controls on the housing market do not necessarily change anyone’s incentives, and where there are strong incentives, people will find a way if at all possible. This is the context for the gyrations in interbank rates last month — since administrative controls are not that effective, macroeconomic levers have to be pulled (this lever was probably pulled because of a jump in loan growth early in the month, which, strangely enough, may have been a statistical artefact arising from a tightening of accounting rules).

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The latest Allensbach poll of German public opinion found the CDU on 40% and the FDP on 6.5%, above the 5% threshold to enter the Bundestag. If the FDP can keep itself above the threshold, then Mrs. Merkel’s present coalition has a good chance of surviving intact after the election.

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Australian Labor politicians remain all over the place on the subject of the carbon tax. I do not have much to say on that subject specifically, but I was amused to see that one of the objections to the present tax is that it has given Australia the highest carbon price in the world — at present. The problem with politicians trying to price things is that they will never get it right. Should they reduce the tax, because of the falls in carbon prices elsewhere in the world? With a weakening economy, will the carbon-reduction target be met with a lower tax, or not? Will the current tax cause a huge undershoot, and thus prove an excessive burden on the economy? Nobody knows. A far better system, of course, is to have an emissions trading scheme (as Australia is scheduled to do from 2015, when it joins up with the EU scheme). But politicians will still interfere. Witness the recent hand-wringing over the collapse of the carbon price in Europe, apparently because permits were “over issued”. Well, perhaps they were, but it strikes me that the whole point of a trading scheme is to allow politicians to set the level of emissions, and the market to ensure that any cuts to production happen in the most efficient way. It makes no sense to fret about the movements of the market price.

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France’s national auditor, the Cour des Comptes, has said that it is unlikely that the country will meet its — already relaxed — deficit target of 3.7% of GDP this year, because the economy will probably shrink. I confess myself un-astonished. Austerity will make the recession worse. There is probably not another solution in Europe, as long as the euro exists, but it would be a good thing if Eurocrats would face reality rather than continually pretending that their deficit and growth projections are reasonable.

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AUD has been very weak. My empirical modelling of AUD suggests that it has a strong relationship with US real interest rates. Its recent behaviour is entirely consistent with that model — real interest rates having risen sharply in recent months.

Another market thought: if the Fed is not going to raise rates for a long time, then there ought to be an opportunity to short the yield curve (buy interest rate futures), either now, or soon. The curve has priced in rate hikes in response to the growing talk of Fed tapering, and they have not been priced out in response to Bernanke’s comments last week, probably because he was rather equivocal on the subject of tapering. He said interest rates would stay low for a long time. It seems he still wants to pretend (analogously to the ECB) that QE and ultra-low rates are different policies. In his mind, they may be, but the distinction does not make sense to me, and it doesn’t appear to make sense to the market either.

Data:

China GDP 7.5% QOY. Has been around this same rate from Q2 2012, so this is hardly news in itself.

China fixed investment 20.1% YTD/Y June. This does look weaker from last year.

China IP 8.9% YOY June. This does look weaker from last year.

China retail sales 13.3% YOY. Hard to interpret as it has some odd patterns.

China new loans 861bn June. Pretty high. Though there was an accounting change that brought more things into reportable territory.

Michigan sentiment remained high at 83.9, d.e. Basically at post-crisis highs.